Friday, April 24, 2015

Will the next big crash be the last one?

As our civilization runs into limits to growth, there are several ways to analyze the situation, all with some validity in their own ways. One might for example think of limits in relation to ecosystem services, pollution and climate change, and these are certainly major challenges that I don't mean to trivialize. But surely the fatal limit we are likely to run into first is worthy of the most attention? If Gail Tverberg is right, our most immediate limitation might be described as "peak finance." She believes the financial aspect of our predicament is capable of bringing the whole system down long before anything else and probably will very soon.

Commodity prices are low now, so most people assume resources are still abundant and we can't possibly be close to the end of industrial production. But limits are manifesting in a way mainstream commentators didn't expect. It comes down to two key words which are really two sides of the same coin: profitability and affordability. In our market economy, commodities must be priced at a level which is both profitable for producers and affordable for consumers at the same time. Unfortunately, sustainable prices are by no means guaranteed by forces of nature or economics. When prices can't rise above production costs, we are in serious trouble even if it doesn't seem that way at first. This kind of unsustainable situation has in fact already arrived, if Gail's view is correct. In this comment on her blog she sums up exactly what she thinks will happen:

It depends on how quickly the failure of banks brings the whole system down. I think the most likely scenario is that the next big crash is the last one. We had a big crash in 2008, and were temporarily saved from it. The next one seems likely to be much bigger, and thus to be much harder to avoid the consequences of.

My expectation is that oil prices will go lower than they are now, and that debt defaults will start hitting the system. Some of these defaults will relate to derivative bets gone wrong. This will start hitting in the next few months. We should be feeling the effects by late in 2015 or early 2016. Oil production will start going down in 2015, and we won’t be able to get it back up again.

I don’t see prices bouncing back up again much, expect perhaps briefly in the next few months (and probably to less than $100 barrel), as people speculate that our problems are temporary. I don’t think shale drillers will be able to qualify for more debt, and this will prevent production from increasing again. There will be similar problems with new oil sands investment.

I recommend reading Our Finite World to understand the nature of what will be the worst disaster in human history and the end of industrial civilization. Gail does not offer any solutions, though, because she does not believe there are any. If perchance there are ways to avoid or mitigate the collapse, now would be a good time to work them out, because we are running out of time.

Sure, I can probably read your essay and comment on it. What level of editing do you need and how big is the text? I can do proofreading and light copy editing, but you need to provide the content yourself. I typically charge about 5 euro cent per word for proofreading.

Another piece of evidence that Gail is right: Røkke's sailboat. Kjell Inge Røkke is one of Norway's most astute investors ever, yet his personal luxury sailboat is his only profitable investment in recent years:

Røkke can only scratch his head and wonder where all the profitable investments went, but if he had read Gail's blog he would have understood what it means. The hunt for yield is doomed to be futile in a world ravaged by diminishing returns. Investing in productive capacity for things people really need will never be profitable again, and our industrial civilization cannot operate at all making only luxury goods for the rich. The outcome is total collapse, and the rich have no more hope than the rest of us.

Actually, let us hope investors don't read Our Finite World, because we need gullible investors who believe in an infinite world to invest in critical but unprofitable infrastructure such as the oil industry in order to put off collapse as long as we can. Let them believe like Røkke that the low oil price is only temporary, because our lives now literally depend on that illusion.

Why wouldn't the the state be able step in to take over from private investors? It would still make a loss but at least the oil could continue to be extracted for a bit longer. Surely oil extraction only becomes impossible because of EROEI not because there is not enough private investment?

I have been wondering the same thing. One reason might be that governments also need profits to keep operating, but they should be able to keep things running a bit longer than private investors who care about nothing but profit. And here in Norway at least, the government acts like just another selfish investor. Norwegians think of the oil industry as this incredible windfall that is supposed to make us rich, not something you run out of necessity. That concept has worked so far and become so ingrained that I don't see much hope of convincing people that it can't work in the future. We now have the absurd situation where Statoil actually borrows money in order to keep paying dividends to shareholders! They care only about profits and not at all about sustainability. So I am afraid we will simply let our oil industry collapse the moment it is no longer profitable and the "extend and pretend" game of adding more debt also doesn't work anymore.

I see no reason why not but then I'm not an oil expert. Thats what I always understood nationalisation to mean. I guess the burden couldnt fall solely on governments of oil producing countries but if our entire civilisation depended on it then surely it shouldnt be difficult to agree to an international effort to keep the drilling going?

Governments are weakening all the time, just take a look at the new TISA and TTIP agreements. The corporations are in the hands of a small elite. They have more power than any governments. And I'm sure they'll never give away any of their power to any governments. They want to have the whole system for themselves.

I think governments would need to have a profit as well, as long as they have to buy the technology of the corporations, and as long as money is created out of thin air.

If it should work for governments I think the profit motive would have to be eliminated, all the technology to be in the hands of governments, and that money were an actual reflection of available ecosystem services. Further these money would have to be shared equally and democratically among all citizens.

Surely the standard of living should fall, especially in rich countries like Norway, but if it was equal for all I think it would be accepted.

1. A political solution to sustainability must include democratic control over production and economy.2. Production must be for the purpose of sustainability, not profit.3. Civil salaries must include all and be decided democratically.

Once the banking system fails, it will be too late to transition to another financial system even if it could have worked longer. I think that is how Gail expects the system to fail. Governments and corporations will try to prop up the current system with debt and hopium until it doesn't work anymore and then we won't have any other way to keep industrial civilization running.

Hello again Eivind. Is it not possible to provide me with an email address? I can send you my essay and you will see how much you'll charge for editing it? It is 12 pages long. I have yet to write my conclusion however, but I have got a feeling that it wont take you too long to go through it

I was recently discussing with a skeptical acquaintance Tverberg's theory of collapse. His response was that if I was so sure that oil prices won't rebound why don't I put my money where my mouth is and bet on oil prices dropping further on city index? I hadn't considered it but I'm wondering whether it might be a sensible idea. Obviously its paper/digital wealth but it still might be put to good use before total collapse occurs:

Yes, if Gail is right, it should be possible to profit from this knowledge in the short term.

Everyone is betting that the oil price will rebound and they even still believe in growth. The latest trend is to invest more in the stock market because banks provide negative returns, and all mainstream financial advisors recommend doing so. It does not occur to them that growth might actually be ending.

I wonder what it takes to threaten the belief that investing in the stock market will always be profitable in the long run. This seems to be one of our culture's most religiously held beliefs, even though it depends on the economy growing indefinitely, which is so obviously impossible in a finite world.

I don't think A.B.B. was even aware of peak oil, so that's not a good comparison. His kind of imagined religious and ethnic struggle is irrelevant in this picture since humanity as a whole is losing to entropy. And secondly, I don't really think we can be saved. The most insightful theorists on our predicament, such as Gail Tverberg, maintain that there is no hope. The best we can do is understand what is happening. And having already accepted that collapse is inevitable, I will be sure to relish the downfall of the scumbags who thought they were in charge as their hateful laws can't be enforced anymore.

His proposal was rejected by the Research Council of Norway in 2014, the same year as the world saw PF. It was our last chance! APF I cannot see a transformation to be possible.

Further, ABBs religious and ethnic struggle is just a distraction. The real problem is the religion of progress. It is this faith that brought us here, to the edge of the cliff, and which is hindering every attempt to mute the crash and make life a little easier for possible survivors.

Also, what will happen with people's minds when they realize the glorious future their religion of progress promised them was a fake? I think they might totally freak out!

Here's Berge doing a great job in enlightening people! The sooner people realize that progress was a fake, the better. This can help people to react and act with some dignity and wisdom. And increase the possibility of survivors of humanity.

After collapse and Antropocen humans will see a very different world from the one we evolved around the last hundreds of thousands of years though, and might evolve into quite different kinds of humanoids than what we are now:

- The future of humankind after the great crash: extinction or the human hive?:

"Also, what will happen with people's minds when they realize the glorious future their religion of progress promised them was a fake? I think they might totally freak out!"

That will be interesting. I especially wonder what will happen when people find out that there is no reliable way to grow their money anymore. People currently think that there MUST be a profitable investment somewhere, because that's what conventional wisdom tells them and it always worked as long as anyone can remember. If not savings in the bank, then housing or the stock market or precious metals as a last resort. None of this will be reliable in a shrinking economy, because if a sure way to make returns on investments existed, everybody would be doing it and the economy would have to be growing. All the conventional advice about saving and investing for the future will be no better than telling people to go play at a casino (and even then, winning would only be meaningful as long as we can preserve industrial civilization).

Most likely we will just collapse before most people realize there is a permanent recession going on, because I don't see how things could function if investors didn't expect returns on their investments and lenders didn't expect debts to be repaid with interest.

"I do not agree with the statement, “There is some level of EROEI needed to fund all of society somewhere in the 12:1 to 8:1 range. Then contraction happens before collapse,” whether or not it has been printed in some journal. Unfortunately, required EROEI changes over time–in fact, required rises over time, because of diminishing returns in other parts of the economy–fresh water, mineral extraction, soil quality, and growing promised pensions. If a value of 10 was really right when it was calculated, it won’t be a few years later. It is not possible to made a (true) statement such as the one you have mede. There is way too much faith in some quoted EROEI as being the answer, IMO."

“But even then martial law will keep a core of the economy going for some time.” Maybe, and maybe not. If banks are closed, I am not sure how those administering martial law will be paid. That makes it hard to keep up martial law.

“Also it will not be uniformly distributed across the planet. Places with still easy to extract oil Iran, Russia, KSA will hold on longer than say Europe, Japan, New Zealand, England, South America.” I agree that it will not be uniformly distributed across the planet, but I don’t think that we know how it will be distributed. The pattern you suggest is a possibility, but so are other possibilities. If banks are closed, there are a lot of the parts of the world that could have major problems, regardless of how easy it is to extract their oil. How long do workers work without being paid? What happens if electricity can’t be maintained? What if needed parts break? These issues affect countries, regardless of how hard oil is to extract.

I do agree that contraction is occurring now. There is a good chance we are not far from collapse."

"Three recent news items remind us that energy transitions take time, a lot of time--far too much time to be shrunk down into a television special, a few talking points, or the next big energy idea.

For example, the complex management task of putting together the international fusion research project called the International Thermonuclear Experimental Reactor (ITER) has resulted in estimated final costs that have tripled since the 2006 launch. Fusion could theoretically offer clean and abundant energy almost indefinitely because it uses ubiquitous hydrogen* as fuel and creates helium in the process. (Water you'll recall is two hydrogen atoms and one oxygen atom and is therefore the most abundant source of hydrogen.)

Despite nine years of effort, ITER has yet to carry out a single experiment; and, the project is not expected to do so for another four years. The idea for such an international project was hatched in 1985 during a summit between U.S. President Ronald Reagan and Mikhail Gorbachev, the leader of what was then still called the Soviet Union. Thirty years later fusion is still receding into the horizon of our energy future.

While there are certainly issues that are managerial rather than merely technical, the technical challenges remain enormous. After decades of experimentation, no laboratory has ever produced more energy from a fusion reaction than it took to create it. One of the most promising tests was performed last year at the National Ignition Facility of the Lawrence Livermore National Laboratory in California. This test produced about 17 kilojoules which was more energy than was used to create the fuel. Problem is, the lasers that initiated the fusion consumed about 2 megajoules or 118 times the amount of energy created by the test.

Keep in mind that this test is still considered one of the most promising. That tells you how far away we are from nuclear fusion as a method for producing electricity."

"My expectation is that oil prices will go lower than they are now, and that debt defaults will start hitting the system. Some of these defaults will relate to derivative bets gone wrong. This will start hitting in the next few months. We should be feeling the effects by late in 2015 or early 2016. Oil production will start going down in 2015, and we won’t be able to get it back up again."

This sounds... well, for want of a better term, crazy. Not only does she expect think that "oil prices will go lower than they are now", combined with lower oil production ("and we won’t be able to get it back up again"!). Amid wars and population explosion... Call me a pessimist all you want, but I expect prices of oil (and certain other resources) to increase sharply. Lower production ought to lead to higher prices, unless demand sinks, which I've seen little evidence for.

And - even worse - she think that these circumstances is problematic! To me even lower production or lower oil prices sounds like a dream coming true. Almost on par with getting a warmer and wetter climate... or winning the Eurojackpot lottery. I hate petroleum producing companies, I hate petroleum producing countries, I hate expensive energy, I hate cold and dry climate, I hate having little money... and soon I might start hating Gail Tverberg. And I use to express myself moderately

Admittedly, I haven't read her blog, but I'm going to take a look today. I bet I'm going to get a few good laughs. I expect that I'm going to repeatedly say, quoting René Artois in "'Allo 'Allo!"; "You stupid woman!".

"That will be interesting. I especially wonder what will happen when people find out that there is no reliable way to grow their money anymore." etc.

Oh, no. We can always try some government intervention. Rising taxes or introducing new ones. More immigration. More ridiculous laws and regulations. More surveillance. More welfare. Lower interest rates. That supposedly solves just about every problem imaginable. Provided it's described as "green", "smart", "fair", "just", "equality", "humanism" or "diversity". Simply outlaw things you don't like... or outlaw discussion on inconvenient topics.

"Kumbaya, my lord." There are no worries. There will be no collapse. Business as usual. Nothing beats Social Democracy.

Charles, I don't think you understand how serious this is. If Gail is right, using less oil and keeping business as usual is not an option. The collapse will not be pleasant, except initially when we can gloat over the downfall of our enemies. Then we shall quickly starve and die ourselves. Imagine having no money because the banks collapsed first, then no electricity and no food. Now Gail is saying that oil prices need to bounce to $130 per barrel this year if we are going to avoid this scenario:

And that is highly unlikely. The economy cannot tolerate anywhere near $130 per barrel, so we won't get it. Instead we get a financial crisis, which will drive prices further down. People will lose their jobs in large numbers, leading to less demand and even lower prices. Your expectation of commodity prices rising sharply can't happen without economic growth, and economic growth can't happen without more oil. Even a small drop in oil production -- which is now assured because of spending cuts in the oil industry -- will lead to a huge financial crisis, and the downturn will feed on itself from there, leading to collapse.

The financial crisis of 2008 was a big crash that came really close to triggering collapse, but the central banks saved us just in time. They are running out of effective remedies now, however. There is only so much you can accomplish with quantitative easing and ultra-low interest rates, since none of this produces any real resources. And unlike the Great Depression, there are no more high-quality natural resources to exploit to get us out of the next one. Our dependence on advanced technology makes it even worse, since our lifestyles require a networked global economy that local communities have no hope of replicating after the system has collapsed. So we will fall very far back indeed.

"Can we be (reasonably) sure that there ever will be a "big crash" again?"

We are doing the same things now that people did before previous crashes; acting like the economy can grow forever and planning everything around that expectation. This clearly does not work in a finite world, and now we are closer to limits than ever, which means the big crash is also getting more likely every day. Something like 24 civilizations have collapsed before us, so why should we be any different? Especially since we don't seem to have learned anything from past collapses and there is no serious plan to implement any kind of managed degrowth.

«The long term energy share of GDP has been going down and down. In my view, what is happening is that we have been getting more and more efficient at obtaining energy products over time, so that we have been able to get ever larger quantities of energy products with ever-smaller shares of GDP. Recently this has turned around, and this is very bad for the economy, because now we are getting less efficient at obtaining energy products. The economy needs a rising total quantity of supplemental energy products to leverage human labor. As we become less efficient at obtaining these products, we have a huge problem getting enough of them.»

«The stone age ended because of too many people, and diminishing returns with respect to using hunting and gathering to get enough food for everyone. They were also running short of easy to obtain stones of the best types, such as flints and obsidian. They no doubt had diminishing returns there as well.

We are running into diminishing returns with respect to obtaining oil, as again have too many people for resources. The Sheik probably was right, at least with respect to the oil being left in the ground.»